Producer Theory

Question 1

What are isoquants

Answer 1

Isoquants show the different combinations of inputs (L and K) that produce the same level of output.

Analogous to indifference curves in consumer theory

Question 2

Define returns to scale

Answer 2

how much does output increase when both labour and capital increase by the factor λ > 1?

Question 3

What type of returns to scale do both perfect substitutes and perfect complements exhibit?

Answer 3

Constant

Question 4

What is the Marginal Technical Rate of Substitution?

Answer 4

The MTRS is the slope of the isoquant

MTRS = (dy/dL) / (dy/dK)

Question 5

What is an isoprofit line?

Answer 5

Shows combinations of output that result in the same level of profit

Question 6

What is Hotelling’s Lemma?

Answer 6

Given the profit function, the producer’s input-demand and output-supply functions can be derived using Hotelling’s Lemma

L(p,w,r,) = - dpi/dw labour demand function
K(p,w,r) = - dpi/dr  capital demand function
y(p,w,r) = dpi/dp output supply function

Analogous to Roys Identity in consumer theory